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HKDSE Economics Practice Paper: Microeconomics, Demand, Elasticity and Market Intervention
HKDSE Economics: Microeconomics and Market Intervention
HKDSE Economics paper: 12 questions, 100 marks, 75 minutes on elasticity, price ceilings, tax, deadweight loss, externalities, monopoly, surplus, minimum wage and quotas.
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Paper details Level: S6 | Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12
Section A (Q1–Q4): Demand, Supply and Elasticity (32 marks)
Each question carries 8 marks. Show your working.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | A campus snack shop cuts its set-lunch price from $50 to $40 and daily sales rise from 100 to 130 sets. (a) Calculate the price elasticity of demand using the percentage method and state whether demand is elastic, unit-elastic or inelastic. (4 marks) (b) The owner plans a further 10% price cut. Assuming elasticity is unchanged, will total revenue rise or fall? Explain with figures. (4 marks) |
(a) Percentage change in quantity demanded = (130 − 100) ÷ 100 × 100% = +30%; percentage change in price = (40 − 50) ÷ 50 × 100% = −20%; price elasticity of demand = 30% ÷ 20% = 1.5. Since 1.5 > 1, demand is elastic. [2 marks working, 1 mark value, 1 mark conclusion] (b) Revenue before = 50 × 100 = $5,000; after = 40 × 130 = $5,200, a rise of 4%. With elastic demand price and total revenue move in opposite directions, so a further 10% cut raises revenue again. [2 marks comparison, 2 marks explanation] |
| 2 | The demand function of a market is Qd = 200 − 2P and the supply function is Qs = 50 + 3P, where Q is quantity and P is price. (a) Find the equilibrium price and quantity. (4 marks) (b) If better technology shifts the supply curve to the right, how will the equilibrium price and quantity change? Explain. (4 marks) |
(a) Set Qd = Qs: 200 − 2P = 50 + 3P, 150 = 5P, P = $30; Q = 200 − 2 × 30 = 140 units. [1 mark equation, 2 marks price, 1 mark quantity] (b) Better technology raises supply and shifts the supply curve right. At the old price of $30 there is excess supply, so price must fall to clear the market: equilibrium price falls and equilibrium quantity rises. [1 mark each direction, 2 marks explanation] |
| 3 | Using the demand and supply functions in Question 2, the government imposes a price ceiling of $20. (a) Calculate the quantity traded and the size of the shortage under the ceiling. (4 marks) (b) Describe two forms of non-price rationing that may appear under the ceiling. (4 marks) |
(a) At a ceiling of $20: Qd = 200 − 40 = 160, Qs = 50 + 60 = 110; quantity traded = min(160, 110) = 110 units; shortage = 160 − 110 = 50 units. [1 mark each] (b) Because price cannot rise to clear excess demand, rationing may take the form of queuing, first-come-first-served, ration coupons, sellers favouring regular customers, tie-in sales or black-market deals. [2 marks each, any two] |
| 4 | The government imposes a per-unit tax of $10 on producers. Demand is Qd = 200 − 2P and the original supply is Qs = 50 + 3P. (a) Find the new equilibrium price and quantity after the tax. (3 marks) (b) How much of the $10 tax is borne by consumers and how much by producers? (3 marks) (c) Calculate the government tax revenue and the deadweight loss. (2 marks) |
(a) Producers receive P − 10, so supply becomes Qs = 50 + 3(P − 10) = 20 + 3P; 200 − 2P = 20 + 3P, 180 = 5P, P = $36; Q = 200 − 72 = 128 units. [1 mark each] (b) Consumers bear 36 − 30 = $6; producers receive 36 − 10 = $26, which is $4 below the original $30, so they bear $4. [1.5 marks each] (c) Tax revenue = 10 × 128 = $1,280; deadweight loss = ½ × (140 − 128) × 10 = $60. [1 mark each] |
Section B (Q5–Q8): Market Structure, Externalities and Surplus (36 marks)
Each question carries 9 marks. Explain with both words and figures.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | A paper mill has marginal private cost MPC = 20 + 2Q and causes marginal external cost of $8 per unit. Market demand is P = 80 − 2Q. (a) Find the market equilibrium quantity and price. (3 marks) (b) Find the socially optimal quantity and price. (3 marks) (c) Find the Pigouvian tax rate that achieves the social optimum and the deadweight loss at the market equilibrium. (3 marks) |
(a) Set MPC equal to demand: 20 + 2Q = 80 − 2Q, 4Q = 60, Q = 15 units, P = $50. [3 marks] (b) Marginal social cost MSC = 28 + 2Q; 28 + 2Q = 80 − 2Q, Q = 13 units, P = $54. [3 marks] (c) The Pigouvian tax should equal the marginal external cost of $8 per unit; deadweight loss = ½ × (15 − 13) × 8 = $8. [2 marks tax, 1 mark loss] |
| 6 | A monopolist faces demand P = 100 − 2Q and has total cost TC = 20Q + 400. (a) Derive the marginal revenue function. (2 marks) (b) Find the profit-maximising output and price. (3 marks) (c) Calculate the profit at that output. (2 marks) (d) Explain why the monopolist charges a price above marginal cost. (2 marks) |
(a) TR = 100Q − 2Q², so MR = dTR/dQ = 100 − 4Q. [2 marks] (b) Profit maximisation requires MR = MC: 100 − 4Q = 20, Q = 20 units, P = 100 − 40 = $60. [3 marks] (c) TR = 60 × 20 = $1,200; TC = 20 × 20 + 400 = $800; profit = $400. [2 marks] (d) The demand curve slopes downward, so selling more requires a price cut on all units and MR is below P. Producing where MR = MC therefore gives P > MC. [2 marks] |
| 7 | In Country A each unit of X produced costs 2 units of Y; in Country B each unit of X produced costs 0.5 units of Y. (a) State which product each country has a comparative advantage in. (3 marks) (b) State the range of mutually beneficial terms of trade. (3 marks) (c) Explain how specialisation and trade raise the total output of the two countries. (3 marks) |
(a) Opportunity cost of X: 2 units of Y in A, 0.5 units of Y in B, so B has a comparative advantage in X. Opportunity cost of Y: 0.5 units of X in A, 2 units of X in B, so A has a comparative advantage in Y. [3 marks] (b) One unit of X should trade for more than 0.5 and less than 2 units of Y, i.e. the terms of trade lie between 0.5Y and 2Y per X. [3 marks] (c) B specialises in X and A in Y, then they trade. With the same resources each can consume more than in autarky, so total output and consumption rise. [3 marks] |
| 8 | In a market demand is P = 120 − Q and supply is P = 20 + Q. (a) Find the equilibrium price and quantity. (2 marks) (b) Calculate consumer surplus. (3 marks) (c) Calculate producer surplus. (2 marks) (d) Calculate total surplus and explain its economic meaning. (2 marks) |
(a) 120 − Q = 20 + Q, Q = 50 units, P = $70. [2 marks] (b) CS = ½ × (120 − 70) × 50 = $1,250. [3 marks] (c) PS = ½ × (70 − 20) × 50 = $1,250. [2 marks] (d) Total surplus = $2,500, the net gain to buyers and sellers from the transactions, and a measure of allocative efficiency. [2 marks] |
Section C (Q9–Q12): Labour Market, Trade and Public Goods (32 marks)
Each question carries 8 marks. Refer to the data given.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | In an industry labour demand is Ld = 600 − 5W and labour supply is Ls = 100 + 5W, where W is the hourly wage and L is hours of work. (a) Find the equilibrium wage and employment. (2 marks) (b) The government sets a minimum wage of $60. Find employment and the labour surplus. (4 marks) (c) Compare the total wage bill before and after the minimum wage. (2 marks) |
(a) 600 − 5W = 100 + 5W, 10W = 500, W = $50, L = 350 hours. [2 marks] (b) At W = $60, Ld = 300 and Ls = 400; employment is limited by demand to 300 hours and the labour surplus is 400 − 300 = 100 hours (100 hours of unemployment). [2 marks each] (c) Before: 50 × 350 = $17,500; after: 60 × 300 = $18,000, so the wage bill rises by $500. [2 marks] |
| 10 | Domestic demand is Qd = 500 − 5P and domestic supply is Qs = 100 + 5P. The world price is $30. (a) Find the quantity of imports under free trade. (3 marks) (b) The government sets an import quota of 40 units. Find the new domestic price. (3 marks) (c) Calculate the total value of the quota rent. (2 marks) |
(a) At P = $30, Qd = 350 and Qs = 250, so imports = 350 − 250 = 100 units. [3 marks] (b) With the quota total supply is 100 + 5P + 40; set 140 + 5P = 500 − 5P, 10P = 360, P = $36. [3 marks] (c) Quota rent = (36 − 30) × 40 = $240. [2 marks] |
| 11 | The marginal cost of a pure public good is constant at $20. The marginal benefits of persons A and B are MBA = 30 − Q and MBB = 20 − Q respectively. (a) Find the socially optimal quantity and compute total benefit and net benefit at that quantity. (4 marks) (b) Explain why the private market usually under-provides such a good. (4 marks) |
(a) Total marginal benefit = 50 − 2Q; set equal to MC = 20: 50 − 2Q = 20, Q = 15 units. Total benefit = ½ × (30 + 15) × 15 + ½ × (20 + 5) × 15 = $525; total cost = 20 × 15 = $300; net benefit = $225. [2 marks quantity, 2 marks calculation] (b) A pure public good is non-excludable and non-rival, so non-payers cannot be excluded (free-rider problem). Consumers hide their true preferences and the market demand curve understates benefits, so private output falls short of the social optimum and government provision or subsidy is needed. [4 marks] |
| 12 | Demand is Qd = 100 − P and supply is Qs = 2P − 20. The government gives producers a subsidy of $6 per unit. (a) Find the equilibrium price and quantity before the subsidy. (2 marks) (b) Find the price and quantity after the subsidy. (3 marks) (c) How much benefit goes to consumers and to producers? How much does the subsidy cost the government? (3 marks) |
(a) 100 − P = 2P − 20, 3P = 120, P = $40, Q = 60 units. [2 marks] (b) Producers receive P + 6, so supply becomes Qs = 2(P + 6) − 20 = 2P − 8; 100 − P = 2P − 8, 3P = 108, P = $36, Q = 64 units. [3 marks] (c) Consumer benefit = 40 − 36 = $4 per unit; producers receive 36 + 6 = $42, which is $2 above $40; government spending = 6 × 64 = $384. [1 mark each] |
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